The real estate landscape is undergoing a significant transformation as frustrated home sellers opt to delist their properties and pivot to the rental market.
This shift is occurring in a climate of rising supply, high mortgage rates, and dwindling consumer confidence, which are discouraging potential buyers from entering the market.
As a result, many sellers who previously planned to sell their homes are now joining the ranks of rental property owners, adding to the competition already posed by institutional investors.
New rentals from these homeowners are emerging as direct competitors to firms that have heavily invested in the rental sector, particularly in regions where these institutional investors dominate.
Leading names in the industry, like Invitation Homes, American Homes 4 Rent, and Progress Residential, manage vast portfolios of rental homes, but they are concentrated in just a handful of significant U.S. housing markets.
An analysis by Parcl Labs reveals that over a third of the assets held by these large investors are situated in only six key markets: Atlanta, Phoenix, Dallas, Houston, Tampa, and Charlotte.
These specific markets have experienced more than a 20% increase in housing inventory over the past year, primarily due to sellers transitioning from owner-occupied homes to rentals.
According to Jesus Leal Trujillo, a principal data scientist at Parcl Labs, home sellers faced with dwindling buyer interest typically consider three options: delisting their homes and waiting for market conditions to improve, slashing prices to reach a market-clearing price, or converting their properties into rentals.
“The last option creates what Parcl Labs terms ‘accidental landlords’: Owners who enter the single-family rental market not by design, but by necessity,” Trujillo explains.
Garret Johnson, who purchased a home in Dallas two years ago, exemplifies the scenario many sellers are facing.
After receiving a job offer in Houston, he initially believed selling his home would be straightforward, but market dynamics proved him wrong.
“Many potential buyers were merely lookers, biding their time for better mortgage rates. Economic uncertainty also played a significant role during the months we listed our house,” Johnson noted.
Faced with this reality, Johnson pivoted to the rental market, finding that he received several offers within days of listing his home for rent.
Despite the rent not fully covering his mortgage, he adjusted his mortgage payments by recasting his loan and switching to a landlord insurance policy to reduce costs.
“I don’t expect to sell for several years. My goal is to eventually generate profit from the rental income versus mortgage costs,” Johnson added.
This influx of inventory into the rental market could pose challenges for landlords, particularly regarding rental pricing strategies.
“While we are unlikely to see substantial decreases in rent, landlords may find it more difficult to achieve annual rent increases,” commented Haendel St. Juste, a senior equity research analyst at Mizuho Securities.
Instead of the typical 4% to 5% rate increases, landlords might only be able to expect 1% to 2% growth in certain markets.
The large institutional investors, however, have continued to see renewal rates between 4% and 5% and are maintaining a 75% retention rate within their portfolios.
This retention is a fundamental aspect of their business model, allowing them to keep their properties occupied while navigating the shifting market.
Parcl Labs’ analysis indicates this isn’t the first instance of homeowners becoming accidental landlords.
In 2022, there was a surge in individuals who owned additional properties beyond their primary residence, a trend driven by soaring mortgage rates.
Interestingly, the largest single-family rental real estate investment trusts (REITs) have recently begun selling off more homes than they are purchasing, as tracked by Parcl Labs.
Despite this selling trend, the REITs are not exiting the rental market entirely.
As Rick Sharga, CEO of CJ Patrick Co., points out, these firms are channeling funds into build-to-rent projects instead of competing with smaller investors for existing properties.
This strategic shift diminishes the competitive threat posed by accidental landlords and allows larger players to optimize their revenue without the need for significant rent reductions.
Nevertheless, St. Juste warns that the major landlords may experience some occupancy declines as they adjust their strategies to enhance revenue.
As we look ahead, there is a risk that increased inventory could surface later this fall or next spring, further limiting rental growth potential for the forthcoming year.
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